Advertisement

Accounting conservatism and banking expertise on board of directors

  • Tri Tri Nguyen
  • Chau Minh DuongEmail author
  • Nguyet Thi Minh Nguyen
  • Hung Quang Bui
Original Research
  • 16 Downloads

Abstract

Previous studies show mixed evidence of the role of banking expertise on the board of directors on accounting conservatism. In this paper, we add to this growing literature by providing an innovative way to measure banking expertise based on life-time working history in banks of all individual directors on the board. We find that accounting conservatism is negatively affected by banking expertise on the board. Also, the results indicate that banking expertise on the board has a more pronounced impact on accounting conservatism when firms have high bankruptcy risk and when firms have high financial leverage. The evidence has some implications for boards of directors.

Keywords

Accounting conservatism Banking expertise Boards of directors 

JEL Classification

G34 M41 

Notes

References

  1. Ahmed AS, Duellman S (2007) Accounting conservatism and board of director characteristics: an empirical analysis. J Acc Econ 43(2–3):411–437CrossRefGoogle Scholar
  2. Ahmed AS, Duellman S (2013) Managerial overconfidence and accounting conservatism. J Acc Res 51(1):1–30CrossRefGoogle Scholar
  3. Ahmed AS, Billings BK, Morton RM, Stanford-Harris M (2002) The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs. Acc Rev 77(4):867–890CrossRefGoogle Scholar
  4. Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Finance 23(4):589–609CrossRefGoogle Scholar
  5. Ball R, Shivakumar L (2005) Earnings quality in UK Private Firms: comparative loss recognition timeliness. J Acc Econ 39(1):83–128CrossRefGoogle Scholar
  6. Ball R, Shivakumar L (2008) Earnings quality at initial public offerings. J Acc Econ 45(2–3):324–349CrossRefGoogle Scholar
  7. Ball R, Kothari SP, Nikolaev VV (2013a) On estimating conditional conservatism. Acc Rev 88(3):755–787CrossRefGoogle Scholar
  8. Ball RAY, Kothari SP, Nikolaev VV (2013b) Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism. J Acc Res 51(5):1071–1097CrossRefGoogle Scholar
  9. Bank of England (2016) List of banks. http://www.bankofengland.co.uk/pra/Documents/authorisations/banklist/bankslist1601.pdf. Accessed April 29 2017
  10. Banker RD, Basu S, Byzalov D, Chen JYS (2012) Direction of sales change and asymmetric timeliness of earnings. Working paper, Temple UniversityGoogle Scholar
  11. Basu S (1997) The conservatism principle and the asymmetric timeliness of earnings. J Acc Econ 24(1):3–37CrossRefGoogle Scholar
  12. Beatty A, Petacchi R, Zhang H (2012) Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism. Rev Acc Stud 17(3):700–738CrossRefGoogle Scholar
  13. Beneish MD, Press E (1993) Costs of technical violation of accounting-based debt covenants. Acc Rev 68(2):233–257Google Scholar
  14. Bhaskar LS, Krishnan GV, Yu W (2017) Debt covenant violations, firm financial distress, and auditor actions. Contemp Acc Res 34(1):186–215CrossRefGoogle Scholar
  15. Bonetti P, Ipino E, Parbonetti A (2017) The role of unaffiliated bankers on conditional conservatism: evidence from IFRS information shock. J Bus Finance Acc 44(7–8):925–952CrossRefGoogle Scholar
  16. Burak Güner A, Malmendier U, Tate G (2008) Financial expertise of directors. J Finan Econ 88(2):323–354CrossRefGoogle Scholar
  17. Byrd DT, Mizruchi MS (2005) Bankers on the board and the debt ratio of firms. J Corp Finance 11(1–2):129–173CrossRefGoogle Scholar
  18. Caskey J, Laux V (2017) Corporate governance, accounting conservatism, and manipulation. Manag Sci 63(2):424–437CrossRefGoogle Scholar
  19. Caskey JA, Peterson K (2014) Conservatism measures that control for the effects of economic rents on stock returns. Rev Quant Finance Acc 42(4):731–756CrossRefGoogle Scholar
  20. Chava S, Roberts MR (2008) How does financing impact investment? The role of debt covenants. J Finance 63(5):2085–2121CrossRefGoogle Scholar
  21. Chemmanur TJ, Ertugrul M, Krishnan K (2019) Is it the investment bank or the investment banker? A study of the role of investment banker human capital in acquisitions. J Finan Quant Anal 54(2):587–627CrossRefGoogle Scholar
  22. Chen H-H (2008) The timescale effects of corporate governance measure on predicting financial distress. Rev Pac Basin Finance Mar Policy 11(01):35–46CrossRefGoogle Scholar
  23. Chou T-K, Feng H-L (2018) Multiple directorships and the value of cash holdings. Rev Quant Finance Acc 53(3):663–699CrossRefGoogle Scholar
  24. Dass N, Kini O, Nanda V, Onal B, Wang J (2014) Board expertise: Do directors from related industries help bridge the information gap? Rev Finance Stud 27(5):1533–1592CrossRefGoogle Scholar
  25. Dechow PM, Kothari SP, Watts RL (1998) The relation between earnings and cash flows. J Acc Econ 25(2):133–168CrossRefGoogle Scholar
  26. Denis DJ, Wang J (2014) Debt covenant renegotiations and creditor control rights. J Finance Econ 113(3):348–367CrossRefGoogle Scholar
  27. Dickinson V (2011) Cash flow patterns as a proxy for firm life cycle. Acc Rev 86(6):1969–1994CrossRefGoogle Scholar
  28. Dietrich JR, Muller KA, Riedl EJ (2007) Asymmetric timeliness tests of accounting conservatism. Rev Acc Stud 12(1):95–124CrossRefGoogle Scholar
  29. Dittmann I, Maug E, Schneider C (2010) Bankers on the boards of german firms: what they do, what they are worth, and why they are (still) there. Rev Finance 14(1):35–71CrossRefGoogle Scholar
  30. Drobetz W, von Meyerinck F, Oesch D, Schmid M (2018) Industry expert directors. J Bank Finance 92:195–215CrossRefGoogle Scholar
  31. Engelberg J, Gao P, Parsons CA (2012) Friends with money. J Finance Econ 103(1):169–188CrossRefGoogle Scholar
  32. Erkens DH, Subramanyam KR, Zhang J (2014) Affiliated banker on board and conservative accounting. Acc Rev 89(5):1703–1728CrossRefGoogle Scholar
  33. Faleye O, Hoitash R, Hoitash U (2018) Industry expertise on corporate boards. Rev Quant Finance Acc 50(2):441–479CrossRefGoogle Scholar
  34. Fich EM, Slezak SL (2008) Can corporate governance save distressed firms from bankruptcy? An empirical analysis. Rev Quant Finance Acc 30(2):225–251CrossRefGoogle Scholar
  35. Financial Reporting Council (FRC) (2012) UK Corporate Governance Code. https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx. Accessed 12 Mar 2019
  36. Gao Y, Khan M, Tan L (2017) Further evidence on consequences of debt covenant violations. Contemp Acc Res 34(3):1489–1521CrossRefGoogle Scholar
  37. García Lara JM, García Osma B, Penalva F (2009a) Accounting conservatism and corporate governance. Rev Acc Stud 14(1):161–201CrossRefGoogle Scholar
  38. García Lara JM, García Osma B, Penalva F (2009b) The economic determinants of conditional conservatism. J Bus Finance Acc 36(3/4):336–372CrossRefGoogle Scholar
  39. García Lara JM, García Osma B, Penalva F (2011) Conditional conservatism and cost of capital. Rev Acc Stud 16(2):247–271CrossRefGoogle Scholar
  40. García Lara JM, García Osma B, Penalva F (2016) Accounting conservatism and firm investment efficiency. J Acc Econ 61(1):221–238CrossRefGoogle Scholar
  41. Gigler F, Kanodia C, Sapra H, Venugopalan R (2009) Accounting conservatism and the efficiency of debt contracts. J Acc Res 47(3):767–797CrossRefGoogle Scholar
  42. Givoly D, Hayn C (2000) The changing time-series properties of earnings, cash flows and accruals: has financial reporting become more conservative? J Acc Econ 29(3):287–320CrossRefGoogle Scholar
  43. Givoly D, Hayn CK, Natarajan A (2007) Measuring reporting conservatism. Acc Rev 82(1):65–106CrossRefGoogle Scholar
  44. Goh L, Gupta A (2016) Remuneration of non-executive directors: evidence from the UK. Brit Acc Rev 48(3):379–399CrossRefGoogle Scholar
  45. Goh BW, Lim CY, Lobo GJ, Tong YH (2017) Conditional conservatism and debt versus equity financing. Contemp Acc Res 34(1):216–251CrossRefGoogle Scholar
  46. Gow ID, Larcker DF, Reiss PC (2016) Causal inference in accounting research. J Acc Res 54(2):477–523CrossRefGoogle Scholar
  47. Heflin F, Hsu C, Jin Q (2014) Accounting conservatism and street earnings. Rev Acc Stud 20(2):674–709CrossRefGoogle Scholar
  48. Hilscher J, Şişli-Ciamarra E (2013) Conflicts of interest on corporate boards: the effect of creditor-directors on acquisitions. J Corp Finance 19:140–158CrossRefGoogle Scholar
  49. Hu C, Jiang W (2019) Managerial risk incentives and accounting conservatism. Rev Quant Finance Acc 52(3):781–813CrossRefGoogle Scholar
  50. Huang Q, Jiang F, Lie E, Yang K (2014) The role of investment banker directors in M&A. J Finance Econ 112(2):269–286CrossRefGoogle Scholar
  51. Jain A, Jain C, Robin A (2019) Does accounting conservatism deter short sellers? Rev Quant Finance Acc.  https://doi.org/10.1007/s11156-019-00819-2 CrossRefGoogle Scholar
  52. Kang MJ, Kim A (2017) Bankers on the board and CEO incentives. Eur Finance Manag 23(2):292–324CrossRefGoogle Scholar
  53. Khan M, Watts RL (2009) Estimation and empirical properties of a firm-year measure of accounting conservatism. J Acc Econ 48(2–3):132–150CrossRefGoogle Scholar
  54. Kim J-B, Zhang L (2016) Accounting conservatism and stock price crash risk: firm-level evidence. Contemp Acc Res 33(1):412–441CrossRefGoogle Scholar
  55. Kim Y, Li S, Pan C, Zuo L (2013) The role of accounting conservatism in the equity market: evidence from seasoned equity offerings. Acc Rev 88(4):1327–1356CrossRefGoogle Scholar
  56. Kong X, Radhakrishnan S, Tsang A (2017) Corporate lobbying, visibility and accounting conservatism. J Bus Finance Acc 44(5–6):527–557CrossRefGoogle Scholar
  57. Kracaw WA, Zenner M (1998) Bankers in the boardroom: good news or bad news. Smeal College of Business Administration, Pennsylvania State UniversityGoogle Scholar
  58. Kravet TD (2014) Accounting conservatism and managerial risk-taking: corporate acquisitions. J Acc Econ 57(2–3):218–240CrossRefGoogle Scholar
  59. Kroszner RS, Strahan PE (2001) Bankers on boards: monitoring, conflicts of interest, and lender liability. J Finan Econ 62(3):415–452CrossRefGoogle Scholar
  60. Lafond R, Roychowdhury S (2008) Managerial ownership and accounting conservatism. J Acc Res 46(1):101–135CrossRefGoogle Scholar
  61. LaFond R, Watts RL (2008) The information role of conservatism. Acc Rev 83(2):447–478CrossRefGoogle Scholar
  62. Larcker DF, Richardson SA, Tuna I (2007) Corporate governance, accounting outcomes, and organizational performance. Acc Rev 82(4):963–1008CrossRefGoogle Scholar
  63. Lennox CS, Francis JR, Wang Z (2012) Selection models in accounting research. Acc Rev 87(2):589–616CrossRefGoogle Scholar
  64. Li J (2013) Accounting conservatism and debt contracts: efficient liquidation and covenant renegotiation. Contemp Acc Res 30(3):1082–1098CrossRefGoogle Scholar
  65. Lin L (2014) Institutional ownership composition and accounting conservatism. Rev Quant Finance Acc 46(2):359–385CrossRefGoogle Scholar
  66. Liu M, Magnan M (2016) Conditional conservatism and the yield spread of corporate bond issues. Rev Quant Finance Acc 46(4):847–879CrossRefGoogle Scholar
  67. Lobo GJ, Robin A, Wu K (2019) Share repurchases and accounting conservatism. Rev Quant Finance Acc.  https://doi.org/10.1007/s11156-019-00804-9 CrossRefGoogle Scholar
  68. Louis H, Sun AX, Urcan O (2012) Value of cash holdings and accounting conservatism. Contemp Acc Res 29(4):1249–1271CrossRefGoogle Scholar
  69. Mora A, Walker M (2015) The implications of research on accounting conservatism for accounting standard setting. Acc Bus Res 45(5):620–650CrossRefGoogle Scholar
  70. Nash RC, Netter JM, Poulsen AB (2003) Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants. J Corp Finan 9(2):201–232CrossRefGoogle Scholar
  71. Nikolaev VV (2010) Debt covenants and accounting conservatism. J Acc Res 48(1):51–89CrossRefGoogle Scholar
  72. Nini G, Smith DC, Sufi A (2012) Creditor control rights, corporate governance, and firm value. Rev Finance Stud 25(6):1713–1761CrossRefGoogle Scholar
  73. Opler TC, Titman S (1994) Financial distress and corporate performance. J Finance 49(3):1015–1040CrossRefGoogle Scholar
  74. Pae J, Thornton DB, Welker M (2005) The link between earnings conservatism and the price-to-book ratio. Contemp Acc Res 22(3):693–717CrossRefGoogle Scholar
  75. Rajan RG (1992) Insiders and outsiders: the choice between informed and arm’s-length debt. J Finance 47(4):1367–1400CrossRefGoogle Scholar
  76. Roychowdhury S, Watts RL (2007) Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. J Acc Econ 44(1–2):2–31CrossRefGoogle Scholar
  77. Ruch GW, Taylor G (2015) Accounting conservatism: a review of the literature. J Acc Lit 34:17–38Google Scholar
  78. Shipman JE, Swanquist QT, Whited RL (2017) Propensity score matching in accounting research. Acc Rev 92(1):213–244CrossRefGoogle Scholar
  79. Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Amer Econ Rev 71(3):393–410Google Scholar
  80. Taffler RJ (1983) The assessment of company solvency and performance using a statistical model. Acc Bus Res 13(52):295–308CrossRefGoogle Scholar
  81. Wang C, Xie F, Zhu M (2015) Industry expertise of independent directors and board monitoring. J Finan Quant Anal 50(5):929–962CrossRefGoogle Scholar
  82. Watts RL (2003) Conservatism in accounting part I: explanations and implications. Acc Horiz 17(3):207–221CrossRefGoogle Scholar
  83. Zhang J (2008) The contracting benefits of accounting conservatism to lenders and borrowers. J Acc Econ 45(1):27–54CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.University of BrightonBrightonUK
  2. 2.University of Economics Ho Chi Minh CityHo Chi Minh CityVietnam
  3. 3.University of East LondonLondonUK
  4. 4.Ho Chi Minh City Open UniversityHo Chi Minh CityVietnam

Personalised recommendations